BWorld 209, Is the PCC a facilitator or a hindrance to business competition?

* This is my column in BusinessWorld last May 07, 2018.

Even before the various competition bills in Congress ultimately became the Philippine Competition Act (PCA) of 2015 or RA 10667, I have been asking myself this question.

After all, I have observed that the main creator of monopolies and oligopolies is the government itself through constitutional restrictions on public utilities and creation of “natural monopolies” like electricity transmission and distribution, water distribution, which, in turn, require congressional franchises.

Other monopolies or oligopolies are created by various agencies, like airline routes (CAB franchise), shipping routes (MARINA franchise), telecommunications (NTC franchise or permit), jeepney and bus line route (LTFRB franchise), tricycle route (LGU franchise).

So the basic question would be: What can the Philippine Competition Commission (PCC) do to limit or curtail the granting of such state-created monopolies and oligopolies?

Last week, I interviewed PCC Chairman Arsenio Balisacan in his office. Sir Arsi is a friend and was my former teacher in the ’90s at the graduate program of UP School of Economics on the subject of Development Economics. [The discussion between Mssrs. Oplas and Balisacan, which covered several topics, will be uploaded on BusinessWorld’s YouTube channel soon. — Ed.]

My opening question to him was a light one, “Do many people mistake the PCC with a racing or sports commission?” He smiled and answered that it seems to be a common misconception for many people especially in non-urban areas, they ask what sports competition the PCC is promoting.

The confusion may be understandable as there are 16 Commissions under the Office of the President alone. These are the Commissions on: Climate Change (CCC), Filipinos Overseas (CFO), Filipino Language (CFL), Higher Education (CHED), Anti-Poverty (NAPC), Culture (NCCP), History (NHCP), Indigenous Peoples (NCIP), Muslim Filipinos (NCMF), Pasig River (PRRC), Women (PCM), Racing (PRC), Sports (PSC), Urban Poor (PCUP), Youth (NYC), and the PCC.

I checked the latest report of the World Economic Forum (WEF), the Global Competitiveness Report (GCR) 2017-2018, to see how competitive the Philippine economy is and by extension, the domestic private businesses, compared to its neighbors in East Asia.

Out of 137 countries and economies covered, the Philippines ranked 56th overall. And of the 12 pillars of the GCR, the Philippines scored high in pillar #2 Macroeconomic environment (22nd) and pillar #10 Market size (27th).

But the country scored very low in three pillars: #1 Institutions (Irregular payments and bribes, Favoritism in decisions of government officials, Burden of government regulations, Reliability of police services…); #2 Infrastructure (roads, railroads, ports, air transport,…) and #6 Goods Market Efficiency (Extent of market dominance, Effectiveness of anti-monopoly policy, Number of procedures to start a business, Time to start a business, Burden of customs procedures), (see table).

There is a direct relationship between a competitive economy and its prosperity, and given the relative smallness of the Philippine economy, what seems to be “big” corporations domestically can be small or medium-size compared to the corporations in our East Asian neighbors.

The PCC checks and prohibits three major acts and behavior: (1) Anti-competitive agreements like price fixing/collusion, bid rigging, output limitations, and market sharing; (2) Abuse of dominant position and market power like predatory pricing, discriminatory pricing, exploitative behavior towards consumers and competitors, and limiting production, markets or technological development; and (3) Mergers and acquisitions (M&A) that restrict or lessen competition in the market.

These point to two important issues.

One, the PCC is concerned only with behaviors of existing competing players but does not cover behaviors of state-created monopolies.

And two, many of those behaviors rendered “anti-competitive” are generally short-term and never long-term, so the imposition of penalties may be a question mark.

Take price discrimination or “price differentiation” and “market segmentation” in economics. This is perfectly normal in market competition as the supplier is optimizing revenues from customers with different needs and different budget or resources. Thus, higher prices are set for those deemed wealthy and lower prices for those financially struggling.

In price fixing/collusion, players here may be digging their own graves as they antagonize customers and invite new players that can quickly provide the goods and services at lower prices. If this happens, the collusion can quickly break up and the old players would try to secure their previous market share eaten by the new player/s.

Competition requires innovation, lots of it in terms of product and service quality, variety, marketing and pricing. Player X’s prices compared to its competitors would look “predatory” yesterday, “collusive” today, and “excessive” tomorrow and these are all fine. Those prices can roller coaster at temporary and short-term durations. New players would tend to give low introductory prices to attract many new customers while innovators would tend to give high prices to recoup their high investments in product R&D, consumers survey, and marketing/promotions.

According to the WEF Executive Opinion Survey 2017, the “Most problematic factors for doing business” in the Philippines are: (1) Inefficient government bureaucracy, (2) Inadequate supply of infrastructure, (3) Corruption, (4) Tax regulations, (5) Tax rates, and (6) Policy instability.

So, is the PCC a facilitator or hindrance to overall business competition in the Philippines?

For me, it’s a tie.

The PCC can be a potential hindrance because its long list of prohibitive acts can be additional deterrent to potential players that are already wary of the corrupt bureaucracy, government-created monopolies, poor infrastructure, high tax rates, and policy instabilities.

But it also has two important functions that can facilitate competition.

One, it gives information to potential and incoming players on how they will be treated in case existing players, foreign and local, will charge and accuse them of “anti-competitive” behavior. And two, it can coordinate with other sectoral regulatory agencies and temper their itchiness to regulate, restrict and prohibit as PCC has the overall view of the degree of competition in the country.

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See also:

BWorld 206, Intellectual property rights in East Asia, May 09, 2018 

BWorld 207, Fare control and surge cap are wrong, May 10, 2018 

BWorld 208, Consumer choice in electricity supply and prices, May 11, 2018

BWorld 206, Intellectual property rights in East Asia

* This is my column in BusinessWorld last April 19, 2018.

The degree of wealth and economic size of East Asian economies generally correlate with their degree of private property rights protection, both physical and non-physical or intellectual property. While protection of physical properties like houses, cars, and land are easier to see and measure, the protection of intellectual property rights (IPR) like patents, copyrights, trademarks, and trade secrets are not so tangible.

IPRs are important because they represent the “heart and soul” of private enterprises and the goods and services that they produce.

For instance, people differentiate and choose shoes made by companies as represented by their logos such as a big check, three striped leaves, or letter F. These same people also choose products from food companies with logos of a double arch, a happy insect, or a smiling young female.

Here are some numbers showing the degree of IPR protection of selected East Asian economies. (Data and report sources are (1) Property Rights Alliance (PRA)- International Property Rights Index (IPRI) 2017 Report, (2) US Chamber of Commerce (USCC)- Global Innovation Policy Center (GIPC), International IP Index (IIPI) 2018, and (3) World Economic Forum (WEF), Global Competitiveness Report (GCR) 2017-2018. The numbers in parenthesis beside each report represent the number of countries or economies covered. The WEF’s GCR is composed of 12 pillars and pillar #1 is about Institutions; among the sub-pillars there is IPR protection).

These numbers show that East Asian tiger economies also rank high in IPR protection. Conversely, emerging economies aspiring to join the club of tiger and developed countries tend to have medium to low ranking in IPR protection. The exception is Brunei, a developed economy in terms of per capita income (thanks to its high gas exports and small population) but it is low in IPR protection.

The issue of IPR protection in the region was tackled by a symposium early this week entitled “Intellectual Property Rights in the ASEAN Economic Community: Challenges and Potentials” at Intercontinental Kuala Lumpur, Malaysia. The event was organized by the Institute for Democracy and Economic Affairs (IDEAS), Malaysia’s first and most dynamic free market think tank.

There are moves to abolish the trademark, corporate logos and branding of products deemed “unhealthy” in many countries.

For instance, plain packaging of tobacco products has been legislated in Australia and France, and is currently considered to be legislated in Singapore too. Such trademark busting policies are also considered as extended to other “unhealthy” products like alcohol, sugary food like chocolates, confectionery and candies.

IDEAS commissioned a study that was presented in the symposium entitled “Challenges in Improving Intellectual Property Rights in ASEAN: Case study of Singapore, Malaysia, Indonesia, Thailand and Philippines” by Adidarmawan, S.H. and Marolita Setiati.

In the paper, the two authors noted that:

“Trademark promotes freedom of choice and enable consumers to make quick, confident and safe purchasing decisions. Standardizing… packaging for tobacco products that would restrict the use of brands, trademarks and trade… concern is if brand marks are eroded, then consumers are not able to differentiate between inferior products and those with a reputation for reliability that may create an environment in which companies may end up competing on price instead of quality. In addition, plain packaging is easier for counterfeiters to copy and could result in an increase in inferior — and more dangerous — imitations. The counterfeiters will have an easier time duping the consumer into buying products that are sub-standard. Brand restriction sets an unfortunate precedent, opening the door for IP rights to be weakened in other industries.”

A BusinessWorld report early this week entitled “Excise tax increase triggers widespread cigarette smuggling” also underscores these concerns.

High taxes, rising regulations and plain packaging have similar effects — they make the consumption of legal and branded products like tobacco and alcohol more restricted and more costly, which open up more space and markets for illicit, illegal, smuggled, and cheaper products. This results in more smoking, more drinking, more consumption of the restricted products.

Governments should focus on protecting private property rights, both physical and intellectual. Weakening such property rights will also lead to a weakened state and strengthen the powers of smugglers and criminal syndicates who do not pay taxes and do not respect brands and intellectual property.

Bienvenido S. Oplas, Jr. is President of Minimal Government Thinkers, a member-institute of Economic Freedom Network (EFN) Asia.

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See also:
BWorld 203, TRAIN, inflation and PPP, April 10, 2018
BWorld 204, Mining attractiveness index and the Philippines, April 30, 2018 

BWorld 205, Energy mix and wishful thinking, April 30, 2018

BWorld 183, Why low or zero income tax can mean more development

* This is my article in BusinessWorld last January 29, 2018.

“The people are hungry: It is because those in authority eat up too much in taxes.

When the government is too intrusive, people lose their spirit.”

— Lao Tzu, or Laozi

(6th-5th century BC)

The good news about the new tax law called TRAIN (Tax Reform for Acceleration and Inclusion) is that overall personal income tax (PIT) rates have declined. The bad news is that the high rates of 30% and 32% were retained, and an even higher rate of 35% was introduced for incomes P8 million a year or higher.

In a period of growing global tax competition, growing decentralization if not disintegration by big governments and countries, economies should introduce low taxes.

Currently, Asian economies with low, flat income tax rates are Mongolia with only 10%, Macau with 12%, and Hong Kong with 15%.

Currently too, there are 10 countries and/or jurisdictions around the world that have zero income tax policy.

Eight of them are in the table below, the two others, Bermuda and Cayman islands, have no available data in the IMF and WEF reports. Hence, they are not included in the table. The global rank and score in the World Economic Forum’s (WEF) annual Global Competitiveness Index (GCI), pillar #1 — Institutions, would represent or proxy for the rule of law of countries included in the report (see table).

These numbers show the following:

1. Citizens of zero income tax countries on average are actually richer (except Bahamas) than people of countries that impose and collect income taxes.

2. Zero income tax countries on average have high scores and rank in the WEF’s GCI (except Kuwait), in institutional strength. The same pattern is also observed for developed Asia except South Korea.

3. Developing and emerging Asia like the ASEAN 5 in the above table have lower scores and global ranking, except Malaysia.

One lesson here is that it is the rule of law, the stability and predictability of institutions, public and private, that largely determine an economy’s wealth and prosperity. Not higher taxes and welfarism, not more regulations and endless subsidies.

These countries like Qatar, Brunei, and United Arab Emirates, even Singapore and Hong Kong, are not known for their big mountains and waterfalls, many white sand beaches and sprawling golf courses. They are known for their liberal and secure investment policies that properly respect and protect private property rights, especially big investments and projects, and non-intrusive tax policies.

Currently, the Department of Finance (DoF) is preparing TRAIN 2, focus on lowering the corporate income tax (CIT) rate from 30% to 25% but with fewer fiscal holidays and exemptions. The goal of DoF is to have a “revenue neutral” law, reduce revenues on one side to be compensated by additional revenues on the other side.

Since the Duterte administration is gung-ho on federalism, this will be a good opportunity for them to drastically cut CIT — only 10%, or 15%, little or no exemptions — then allow the regional or state governments to have their own CIT.

The advantage of this setup is that it instills tax and investment competition among the regions and states.

Thus, the future state of southern Luzon for instance will have a CIT of 15%, the state of western Visayas will have a CIT of 10%, the state of northern Mindanao will have a CIT of only 6%, another state will have zero CIT, and so on.

The DoF should align its fiscal priorities with the political priorities of Malacañang and Congress.

TRAIN 1 was lousy because it raised many national taxes or created new ones even if the DoF is aware that soon there will be less national government departments, bureaus, and welfarism to be compensated by more state government departments and welfarism.

Let TRAIN 2 compensate for the short-sightedness of TRAIN 1. Let the national and soon federal government step back as the regional and state governments step forward.

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See also:

BWorld 171, Global vs national tax reforms, December 29, 2017

BWorld 180, Has East Asia liberalized its trade enough? January 19, 2018 

BWorld 181, Effects of Supreme Court TRO on RCOA, January 22, 2018
BWorld 182, Asia Liberty Forum 2018 in Jakarta, January 31, 2018

BWorld 100, Multinationals in the PH, what do they want?

* This is my article in BWorldEconomicForum, December 14, 2016.

CAPITAL AND INVESTMENTS are like water — they go where they are welcome and accommodated. Small water tributaries merge with others to become a big river, a lake, or drain into the seas. In the same way, capital congregates in areas where they are protected and allowed entry and exit with the minimum restrictions and prohibitions.

  

That is how some small countries and territories with fewer populations become wealthy and prosperous financial centers such as Singapore and Hong Kong.

The subject of multinational corporations in the Philippines was among the subjects discussed during the BusinessWorld-PAL ASEAN Regional Forum last Nov. 24 at Conrad Hotel at SM MOA Complex. Session 4 was “Investing in the Philippines: Insights from Multinational Companies” and there were five speakers: Rajiv Dhand, regional vice-president & general manager for operations of TELUS International Phils.; Laurence Cua, UBER country manager; Henry Schumacher, European Chamber of Commerce senior adviser; Jericho Go, Megaworld senior vice-president; and Alexander Cabrera, PwC Philippines chairman & senior partner.

Almost all speakers talked about their respective companies and their contributions to the country’s economic growth and job creation, among others. Mr. Schumacher, being the most experienced foreign businessman among them, provided the most direct answers to the theme. He said that what the foreign investors are looking for, among others, are (1) safe and secure investment locations like PEZA and other ecozones, (2) business-friendly local government units (LGUs), partnership between LGUs and businesses.

The turn off for businesses he said, are (1) corruption and unethical business practices, (2) no peace and order, and (3) changing rules and policies.

The World Economic Forum (WEF) produces an annual Global Competitiveness Report (GCR) where it measures 12 pillars of competitiveness of countries and economies worldwide. The pillars are grouped into three major subindices — basic requirements (pillars 1-4), efficiency enhancers (pillars 5-10), and innovation and sophistication factors (pillars 11-12). From these three subindices, the global competitiveness index (GCI) is computed and countries are ranked from highest to lowest.

Of these 12 pillars, the Philippines ranked badly in four measures: (1) institutions, (2) infrastructure, (6) goods market efficiency, and (7) labor market efficiency.

Institutions include property rights protection, corruption and bribery in government, judicial independence, wastefulness in public spending, burden of regulations, business costs of crime and violence, strength of investor protection, etc.

Infrastructure include the quality of roads, ports, railways, air transportation, electricity supply and telephone subscriptions.

Goods market efficiency cover intensity of local competition, anti-monopoly policy, business taxation, procedures and time to start a business, tariff and non-tariff barriers, prevalence of foreign ownership, customs procedures, etc.

Labor market efficiency includes flexibility of wage determination, hiring and firing practices, taxation on incentives to work, reliance on professional management, country capacity to attract and retain talent, female participation in labor force, etc.

Results are shown below for the two GCR reports 2014 and 2016.

Multinational corporations in the Philippines: What do they want?

These numbers show the following:

One, Singapore, Japan, and Hong Kong are in the top 10 most competitive economies in the world, with very high scores and ranking in infrastructure.

Two, the Philippines needs to improve efficiency and competitiveness in these four pillars because they have pulled down the country’s overall ranking. There was even a decline in overall ranking from 52nd in 2014 to 57th in 2016.

Three, there are lessons to learn from neighbors Malaysia, Thailand  and Indonesia which have higher rankings than the Philippines. Vietnam and Cambodia’s overall ranks are improving and Vietnam may soon overtake the Philippines.

In the WEF’s Executive Opinion Survey 2016, these six factors are the most problematic: inefficient government bureaucracy, inadequate supply of infrastructure, corruption, tax rates, tax regulations, and Policy instability.

In short, government is mainly the problem.

There are three possible solutions here. One is to institute huge, large-scale professionalism in government, both elected and appointed bureaucracies, in both national and local government agencies.

Two, shrink the size and burden of government bureaucracies, regulations and taxation.

And three is to do both, improve the professionalism while shrinking the size of bureaucracies so that they can focus more on enforcing the rule of law and have little time and space for creating new regulations and taxation that tend to complicate if not contradict previous ones.

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See also: 
BWorld 97, Direction of trade of Asian economies, December 21, 2016
BWorld 98, Asian stock markets and the Duterte administration, December 30, 2016 
BWorld 99, China insecurity and belligerence, December 30, 2016

Ipagbawal ang GDP Growth, Part 2

A friend, Prof. Bong Mendoza, posted this  news report last January 30, 2015.

The reporters, Rina Chandran and Sharon Chen, were at the Ayala-UPSE forum at Intercon Hotel in Makati last January. I was there too. It was NEDA Sec. Arsi Balisacan who said "no longer sick man of Asia", not the reporters, not their editor/s. The article makes sense. 

The sections on consumption boom and population boom, it's true. Our big, young population is an asset, not a liability. More population means more producers and consumers, more entrepreneurs and workers. Thailand -- and Japan, S. Korea, HK, Singapore, Taiwan, China -- they are ageing. In many parts of Japan for instance, the sale of adult diapers is larger than the sale of baby diapers. Their public spending for healthcare and pensions will jump to the roof, or the sky, while the number of their young workers who will pay taxes and pension contribution will remain flat, if not declining. BIG problem for them, but not for the PH.

Bong also posted the latest WEF's Global Competitiveness Report, 2014-2015. Thanks Bong.  
Check the summary table, Table 3: The Global Competitiveness Index (GCI) 2014–2015 rankings and 2013–2014 comparisons.

It Is true that Thailand has higher GCI rank than the PH. But there are many indicators of global competitiveness. Our Constitution alone would quickly put down out competitiveness -- foreign competition and investment in many sectors is banned, or restricted to 40 percent maximum. In Thailand and other Asian economies including socialist Vietnam and China, foreign investors and competitors are allowed up to 100 percent equity in many sectors.

Some people hate to see and read the above Bloomberg and similar reports. They think there should be no good news in the PH. What we should read only are dirt, pollution, heavy traffic, trains breaking down, corruption, crimes, etc. 

Wala or konti lang dapat good news sa atin. Negative news lang dapat. Maybe it makes them feel good about themselves. Kaya dapat Ipagbawal ang GDP growth.

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See also:
Fat Free Econ 43: On the Philippines' Fast Economic Growth, June 04, 2013 
Fat Free Econ 49: Growth Amid Storms, December 03, 2013 
Economic Growth and Whiners, Ipagbawal ang GDP Growth! March 18, 2015